Business, Government, and Climate Change

What to do, what to do. Personally, I love the “3% solution” being put forth by World Wildlife Fund. Refreshingly, it seeks a partnership with business rather than assuming that business is the wolf that must be kept thin or else it will devour us all. But that’s just one idea, no guarantee it will work, but part of a whole range of possible actions. Of course, government also plays an important role.
Some measures to reduce GHGs may be counter-productive in the near term but ultimately bring about an overall reductions. An example would be government regulations mandating carbon capture technology installed in all new manufacturing facilities, which would lead some companies to delaying building new facilities, relying instead on less efficient and higher carbon emitting old facilities. Whether the measures are worth it depends on several factors, such as how long the counter-productive period lasts.

Another consideration: if a government favors a particular technology through special grants and tax breaks, that may channel resources away from R&D on other technologies that would have been better in the long run. Whatever the policy, consider trade-offs and the possibility of unintended consequences, and always be willing to cut bait if the effort turns out to be counterproductive. One problem with government favors is that they create interest groups that then resist change. So the favors should be time-limited and require legislative action to renew.

Then there’s the downside of success. Say, for instance, the US manages to greatly reduce consumption of CO2-emitting products, especially for electricity generation and transportation, lowering global demand for oil, reducing the global market rate for oil, increasing consumption of oil elsewhere. That may be ok, because eventually the technologies that resulted in reduced consumption in an advanced economy will filter out to other economies, especially as they get cheaper to produce and keep improving.

But if a technology is essentially subsidized by the government because businesses haven’t figured out a way to make them affordable, then that might discourage innovation and eventual affordability, not only for rich countries but poor ones as well.

A carbon tax would be part of the mix. But not too onerous. A problem with using a harsh punitive approach to CO2 emissions is the likelihood of electoral backlash, economic turmoil and reversal of public support for environmental protection. Also, if a large carbon tax succeeds in reducing GHG-emitting production and consumption, global prices for oil would go down and at least partly neutralize the effect of any tax. This is not to say that a carbon tax is not ok but such a tax would have to be carefully crafted and implemented.

Certain GHG-reducing proposals could make things worse. Some may encourage gaming the system and result in a net increase in emissions. This just happened with the European cap and trade system, with Russia and Ukraine doing a major scam on their well-meaning partners.

Mandating specific emission reductions for individual companies could also create problems, especially the creation of perverse incentives and disincentives. If the reductions are based on a baseline, businesses will prefer high baselines so that reductions are more doable and less costly. For instance, when in the market to buy new manufacturing facilities, a company might want to buy high-emitting operations to establish a high baseline, thus reducing subsequent compliance costs.

I personally like combining the carrot approach with gentle pressure, such as the WWF’s 3% Solution. Have respected, non-divisive environmental organizations work closely with businesses to reduce emissions and provide free publicity for those that jump on board. Companies do value the good will of the public. So what if they’re motivated by profit?

Relying on sticks alone will backfire. People will find a way to get around the rules, forcing regulators to play a constant game of whack-a-mole.